Excel Quant Backtester, & Down on the Farm

Note: Many do not realize a subscription to The Idea Farm includes a tactical Excel backtester with data back to the 1970s…it’s pretty cool and we will update with 2013 data soon…

Between publishing two books and launching some new funds, unfortunately the last few months I have not had as much time to write on the blog. This summer I will be devoting lots more time to the blog, as well as cranking on a few new interesting pieces.  That, and making a couple BIG announcements in the next few weeks so stay tuned… 

A good deal of my content in the meantime has migrated to Twitter and The Idea Farm.  Below are a few cool charts we’ve featured from Idea Farm pubs in the past few months….

sitka

 

Source: Sitka

 

erb

 

Source: Erb

 

OSAM

 

Source: OSAM

macro trader

Source: The Macro Trader

Home Bias, Everywhere

Here is another great screenshot from JP Morgan, where it shows a big bias that even institutional investors have all over the world…

 

Screen Shot 2014-05-26 at 1.59.33 PM

Skin in the Game – My Portfolio

Next time you sit down with your advisor, ask him or her a simple question:  

How do you invest your own money?

Don’t settle for a simple “well, uh, I have some stocks and bonds, and, umm, some CDs”…ask them specifically what their allocation percentages are, and what funds they use etc.  Many find it very uncomfortable to disclose and many will refuse to do so!

As far as fund managers, many managers don’t even invest in their own funds.  (Here are a few articles on how little managers invest in their own funds herehere, and here.)

In addition, many commentators are willing to provide you with plenty of advice but just try getting them to disclose how they invest their own money – impossible!  How many commentators can you identify that invest in their own funds and are transparent with where they invest? They are happy to give you advice, but forbid they tell you how they invest!  A client asked me the other day how I invested my own money, and I thought that was an interesting idea to just go ahead and write it up. 

This post really has no meaning to you in the sense that you should invest in the best possible way for your situation and your risk tolerances and goals.  How I invest should really have no bearing on how you invest, other than knowing a manager has “skin in the game”.  That sounds basic but it is true.  Anyways, I thought I would outline my portfolio below to let you tag along with how I think about the world and investing with my own personal money.

By far the largest percentage of my portfolio is ownership in my company Cambria Investment Management LP, in the ballpark of 50-95% of my net worth depending on how you value the company. Other illiquid investments include ownership of The Idea Farm, a small passive equity stake in AlphaClone, a share in our family farmland in Kansas, and a share in family real estate and land.

Since Cambria alone dominates my net worth, the actual investable portion is smaller but certainly meaningful.  My horizon is very long term and I have a high risk tolerance.  

Of my investable portion, all of it is invested in our funds and strategies.  Below, in order of size:

Global Tactical private fund, Global Value ETF, and equal amounts of the Shareholder Yield ETF and the Foreign Shareholder Yield ETF.  All of my cash flows simply funnel into these four investments on a periodic basis.  As you can see, my holdings are dominated by foreign stocks, portfolios that can and do have the ability to move to cash (and have a high exposure to real assets), and stocks returning lots of cash to investors.  I am least exposed to traditional bonds but for me they are not that attractive for my time horizon and goals.

If you don’t believe me, or want to see how much your manager is invested in his own funds, the filings are public so go take a look!

So, next time you are chatting with your advisor or broker, or hear someone giving lots of advice at a conference, ask them one simple question: “What do you do with your money?”

Books in the Mail (or Pre-Ordered)

Travel: Boston Paris London NYC

I will be in Boston Monday and Tuesday for the IMCA conference:

http://www.imca.org/conferences/imca-annual-conference

Then off to Paris and giving a talk in London:

https://secure.cfauk.org/events/events-details/index.html?article=MjE0MQ==

Then a few days in Europe (undecided where just yet, any suggestions?)

then in NYC May 19-22…come say hello!

Twitter Updates

A few updated links for those not following me on Twitter @MebFaber.
 

How to Start an ETF

I gets lots of questions over email and in person on a handful of topics.  Usually I try to incorporate all of them into a longer written piece that includes my personal opinions and experiences that readers can then reference.  You can find some older ones here on the following topics:

Global Tactical Asset Allocation & Asset Allocation

Self-Publishing a Book

Income Investing, Risk ParityBubblesPensions, Black Swans, and Valuing Global Stock Markets.

One of the themes I get a lot of questions on is the process of starting and managing an ETF.  We have somewhat of a unique perspective as a user, investor, sub-advisor, and advisor of ETFs.  I thought I would summarize all of the questions I get on a regular basis – if you have any more questions fire them over and I’ll incorporate into the article.  But first, some background.

Separate Accounts

We started our firm in 2006 with lots of ideas, but no definite roadmap as to what structure would best suit our firm.  We began with separate accounts.  Separate accounts have numerous benefits, namely a) a relationship with the client, and b) ability to tailor the strategy to their particular risk tolerance or tax situation etc.  Those both can also be drawbacks of course, as client relationships can be time consuming and headache inducing.  However, they can also benefit the client as they have someone looking over their investments and potentially talking them off a ledge and doing silly things at the wrong times.  Raising assets through separate accounts is driven largely by relationships and marketing.  For an example, take a look at Fisher Investments, one of the all time great marketing companies via direct mail (and now in print and online).

We still do separate accounts but this is largely for high net worth investors where we can offer some personal touch.  Look for a big announcement here soon.

Hedge Funds

We launched two hedge funds back in 2009, largely for clients looking for more aggressive strategies that included leverage.  We closed the first one when we launched our first ETF, but still have two open, including an insurance dedicated fund for a family office.

ETFs

If an ETF launches with no assets and fails to raise any, you are probably on the hook for ~$150K in expenses per annum.  That is a lot of checks to write. Launching an ETF is very much like a rocket getting out of gravitational orbit, it needs an escape velocity of perhaps $30-$50 million to get profitability.  There also becomes a chicken and egg problem – ETFs with low assets and volume are often seen as orphans as larger investors have AUM and volume minimums, but the ETF cannot get larger without assets and volume.  This is why you have seen in the early 2000s about 80% of ETFs launch successfully, while in recent years that number is closer to 20%.  Unless you KNOW that an ETF can be seeded with, or raise enough assets to get to this $30-50M range quickly, it has a much higher chance of failure, especially now that there are so many products.  Some firms adopt the shotgun/VC approach, hoping a small number of very large ETFs will subsidize all of the small ones.  Other firms adopt a rifle approach with only their best ideas.  Both can succeed or fail.

Index Provider

We first considered launching an ETF with Claymore (now Guggenheim) when Forbes was looking to move into the ETF space.  Our launch date for “IVY” was 12/2008, talk about bad timing!  However this would constitute the first method of launching an ETF – as index provider.  Typically this is the least effort, you simply provide an index that updates/rebalances, but also the least rewarding monetarily.  Typically the index provider can earn as little as a few basis points on the low end, to perhaps 30 on the high end.  Lots of ETF companies will license an index if they think there is product demand.  The PowerShares Research Affiliates relationship is a good example of a very successful advisor/outside index provider.  Lots of companies will track indexes for a fee of $2,000 -$30,000 like Solactive, S&P, MSCI, NASDAQ, etc.

Sub Advisor

Subavisory is usually when a RIA that does not have, or want the SEC exemption to launch ETFs, partners with a company that does. The model is very similar to the publishing industry where a content provider parters with a firm to provide infrastructure support.  There are a number of players here including AdvisorSharesExchange Traded ConceptsAlpsETF Issuer Solutions, and Canvas.  If you are a manager looking to partner with one of these firms, they will send you a basic proforma that will ballpark most of the costs and profits as you raise (or don’t) assets.

The economics are more favorable than index licensing (generally), but may also involve upfront fees ($0-100k) or exposure to monetary risk if the ETF does not raise assets.  Typically the subadvisor receives somewhere in the ballpark of 50-90% of the profits from the ETF, depending on other costs and risks taken.  

Other pros of subadvisory is not having to build the infrastructure that goes along with launching an ETF and the subsequent costs like board meetings, hiring a CCO, and other duties.  

Cons of subavsiory include loss of control over the product, revenue sharing, branding confusion, etc.

This option is usually a great choice for those who are looking to only launch one or two ETFs, and not have to deal with pursuing their own exemption.

Advisor/Sponsor (also more economics) –

You can find a full list of advisors here: http://etfdb.com/issuers/

You can find the list of advisors by AUM here:  http://www.etf.com/sections/etf-league-tables/21817-etf-league-table-as-of-april-15-2014.html

Becoming a sponsor is time consuming and costly.  Expect 12-16 months, and (mostly legal) expenditures of $200-300,000.  However, once you have the exemption you can take ETFs to market in approximately three months if the strategy is plain vanilla, or six to infinity months if not.  I expect the SEC to streamline this process in the future.

Pros include autonomy, full revenue capture, and total control over the product.  

Cons include costs, infrastructure buildout, and time to market.

Benefactor/Seeder

This is a new business model where real money instiutions have an ETF idea, and agree to seed it to see it come to market.  Some recent examples include Arizona and Fisher.

I am surprised more taxable real money institutions (like family offices) don’t launch their own ETFs for their internal, active strategies for two reasons – tax efficiency, and potentially revenue capture.  

When will we see the first endowment or family office ETF?

 

 

The Global Market Portfolio

Graphics from Jan 2014 Update of “The Global Multi-Asset Market Portfolio 1959-2012″

 

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Free Books

I’m starting a hellish travel schedule for the next six weeks, and usually I like to give out free books at the talks so people don’t get obsessed with taking notes.  So, for the next five days my eBooks are free on Amazon – so download away and let me know what you think!

PS If you don’t have a Kindle/iPad you can download the Kindle software onto your CPU.  Also, it looks best in color – old Kindle users are reporting it is hard to read…enjoy!

LINK TO DOWNLOAD HERE.

 

A Spectrum of Possibilities (Probabilities)

Valuation works over long time periods.  In the short term, anything can happen.  The US market was slightly expensive at the end of 2012, but lo and behold it returned over 30%.  Below is a fun chart of yearly CAPE values back to 1900 and future 1o year returns, and I will keep the commentary light as the conclusions should be fairly self evident.  Notice most of the red and yellow years end up on the left side of the chart of low returns, although there are some on the right side.  And vice versa with the green ones.

Most investors like to think in binary terms.  Stocks are either cheap and a buy, or expensive and a sell (or crash!!!).  I’m convinced they think this way along the same lines they like to cheer for sports teams (it’s more fun).  I tell investors using valuation is a spectrum of future possibilities.  While buying expensive markets generally will produce lower future returns, you will have positive outliers.  The same for cheap markets, it’s usually a good idea but they can always get cheaper.  

probabilites

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